Administrative Barriers to Small Business in Russia: Results from a New Survey
By Ekaterina Zhuravskaya and Oleg Zamulin 

In collaboration with the World Bank and with financial support from the U.S. Agency for International Development, CEFIR is continuously monitoring the level of the regulatory burden Russian government agencies impose on small businesses. This article presents the results of the first two rounds of the monitoring work, conducted in the spring and autumn of 2002, to measure changes over time in the administrative costs of doing business and to document the progress of deregulation reform recently started by the Russian government.

The deregulation package recently introduced in Russia will significantly simplify procedures for businesses and reduce the administrative costs of business inspections, licensing, certification, and registration. The government is reducing the tax rates in the simplified tax system for small firms and making procedures for shifting to this simplified system easier and more available for a broad range of firms. Several laws pertaining to the deregulation package have already been enacted: the Law on Inspections took effect in August 2001, the Law on Licensing in February 2002, the Law on Registration in July 2002, and the Law on the Simplified Tax System and the Law on Standardization and Certification in January 2003.

The first round of the survey collected baseline information about 2001, the year before any of the deregulation laws came into force. The data from the second round allow evaluation of the reform progress after the enactment of the new law: on inspections and licensing. The third round is scheduled to take place in spring 2003 and will allow evaluation of the impact of the new laws on registration and the simplified tax system. Two more rounds are planned for 2004 and 2005.

The monitoring is done through regularly repeated surveys of 2,000 firms in 20 regions of the country. The surveys include questions about firms’ actual costs of doing business and their general perceptions of the business climate. We are using two primary survey instruments, one for firms established more than a year ago and one for recent start-ups. The survey for established firms inquires about the burden imposed on them by inspections by different government agencies, by licensing and certification regulations, and by tax administration and about firms’ general perceptions of the business climate. The survey for new firms monitors entry costs and contains questions about registration procedures, licensing, and certification for new firms. Thus we are collecting panel data to monitor the administrative burden on existing firms and repeated cross-sectional data to monitor the regulatory costs of entry.

The main result of the first round was that deregulation in 2001 did not go as far as proclaimed in the new legislation. However, by the second round the situation had improved significantly, both in terms of inspections and licensing (between the two rounds new laws have been enacted in both areas). The deregulation of inspections progressed further in the first half of 2002 than previously. Distortions caused by seasonal fluctuations could be excluded in the case of inspections, but not enough data has been collected to do the same in the areas of licensing, registration, and certification. Therefore while improvements in the regulatory environment are reasons for optimism, caution is called for in comparing data from autumn 2001 with that of spring 2002. Only after the third round of our survey will we have enough data to be able to control for seasonality and ensure that improvements were related to the reform.

Inspections

According to the new law, planned inspections should be conducted no more than once every two years by any agency. Before the new law came into force in August 2001, many firms experienced more than one inspection every two years by each agency. After the enactment of the new law the number of inspections by all government agencies fell significantly. Between the first half of 2001 and the first half of 2002 the average number of inspections fell by 21 percent, and between the second half of 2001 and the first half of 2002 they fell by 27 percent. Consequently, both the time that management spends on inspections and the costs of inspections to firms decreased. Another interesting finding was that fire safety and sanitary inspection agencies—the two most problematic inspection agencies among those regulated by the new law—suspended many of their activities: 61 percent of the firms surveyed did not have to deal with any fire safety inspections in the first half of 2002 and 73 percent of the firms did not undergo any sanitary inspections during the same period. During the first half of 2002 fire safety inspectors only came to 11 percent of firms more than once and sanitary inspectors only visited 9 percent of the surveyed companies more than once.

In the first half of 2002, 6.4 percent of firms reported that fire safety inspectors violated the new law and 5.2 percent of firms indicated the same about sanitary inspectors. Firms have also reported frequent "unplanned" inspections, especially by the police department, which was responsible for 45 percent of these ad hoc visits. Approximately 12 percent of firms considered inspections as "presenting very serious problems" or "threatening the existence of the firm." During two-thirds of all "unplanned" inspections the inspectors did not present a warrant.

Licensing

The new law on licensing regulations came into effect in February 2002. The law significantly reduced the number of activities that require licenses, cut the license fee from Rub 3,000 to Rub 1,300 and extended license duration from three to at least five years. As a result, the proportion of firms that applied for licenses and permits dropped from 29 percent in the second half of 2001 to 19 percent in the first half of 2002 and the average time needed to acquire a license fell from 37 to 33 days.

The number of illegal licenses remained high, however, amounting to 33 percent of the total, and 700 different types of permits and licenses still exist, 224 of which respondents were applying for at the time of the survey’s second round. In addition, despite the new regulations the average cost of a permit exceeds Rub 1,300 and almost half of all licenses expire in less than five years. Thus licensing remains as an impediment to growth for many firms: 14 percent said that licensing presents a "severe problem," down from 20 percent six months earlier. Thus many complications pertaining to licensing and inspections are associated with local enforcement rather than with regulating legislation.

Registration

The new legislation that came into effect in July 2002 established a "one window" rule: entrepreneurs need to visit only one government agency to register their businesses. It also mandates that the registration of a new business should not take more than five days or cost more than Rub 2,000. Our survey, which took place before the enactment of the new registration law, shows that administrative costs of entry both during the second half of 2001 and the first half of 2002 are still substantial: on average registration took about a month and cost about Rub 4,500.

Certification

The certification process improved slightly between the two rounds. Fewer firms applied for certificates, 15 percent of firms compared with 11 percent, while the average waiting time for a certificate fell from 32 to 26 days. Neither the cost nor the duration of certificates changed much, however.

Perceptions

Entrepreneurs’ general perceptions about the business climate improved markedly between the two rounds. They perceived taxes, macroeconomic instability, regulations, capital access, anticompetitive barriers, and corruption as smaller problems in the first half of 2002 than in the second half of 2001. Remarkably, in 2002, for the first time in the post-Soviet Union period, firms perceived competition as a more serious problem than government regulations. Competition was the only area that firms perceived as more difficult in the second round than in the first round.

Simplified Tax System

Firms, especially those that do not use the simplified tax system, claim that the tax system has become more cumbersome between 2001 and 2002. Under the simplified system the average number of different taxes has been reduced from nine to seven. Firms that took advantage of this system also reported less dissatisfaction with tax level and documentation requirements. Surprisingly, only 27 percent of eligible firms use this simplified system, with the rest claiming that adhering to the standard procedures is simpler.

Some Determinants of Reform

The progress of reforms varied somewhat from region to region. The local fiscal federalism arrangements, that is, the extent to which regions do not tax additional local revenues, has had a positive effect on the dynamics of deregulation. Municipalities with better fiscal incentives were able to cut the regulatory costs of inspections. The presence of large firms in a region slows down licensing reforms, but accelerates inspection reforms and entry barriers are removed relatively slowly. Meanwhile, the presence of many small businesses in a region improves the enforcement of new deregulation laws, thereby demonstrating the effectiveness of small business lobbies.

Intermediaries: Institutionalized Corruption or Enhanced Efficiency?

In the second round of the survey 41.2 percent of the firms surveyed noted that they had used an intermediary for registration, 11.6 percent used one for licensing, and 6.2 percent used one for certification, compared with 54.9 percent, 15.6 percent, and 6.1 percent, respectively, in the first round. About 20 percent of certificates and licenses could be obtained only through intermediaries, and managers said that was the reason why they hired intermediaries. The authorities recommended intermediaries for 20 percent of license applicants and 8 percent of those applying for certificates. The registration agencies were always ready to consider applications without an intermediary, unlike the agencies in charge of issuing licenses and certificates.

Conclusion

The first two rounds of monitoring showed that the surveyed firms were able to cut their administrative costs related to licensing and inspections considerably, and these were the two areas of regulation in which laws had been enacted between the rounds. The administrative costs of certification did not change significantly between the two rounds. These results suggest that the improvements in licensing and inspections are reform-driven. Overall, the results of the second round of monitoring are cause for cautious optimism. Yet despite the positive effects of the new deregulation laws on licensing and inspections, the regulatory burden on small firms remains high and the government should take more steps to enforce the laws. 

Ekaterina Zhuravskaya is academic director and senior researcher at CEFIR, an independent economic research and policy think tank based in Moscow, and Oleg Zamulin is an assistant professor at the New Economic School, Moscow, and at CEFIR. For more information about the survey go to http://www.cefir.org/.